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‘Imagine you have a lot of mangoes on your farm and your neighbor has lots of tomatoes. You make a bargain and he says he will give you three tomatoes for every mango you give him. If you give him fourteen mangoes, how many tomatoes do you expect him to give back to you?’

This question, amongst others, has been asked in the 2009 and 2011 Kenya FinAccess surveys. If you got the answer to this question right (see end of the blog for the correct answer), congratulations! It may be an indication that you are financially literate. Or would you rather be financially capable? ‘Financial Literacy’ and ‘Financial Capability’ are two terms many have heard about and usually they are used interchangeably. However, in a recent World Bank publication, which tries to ‘Make Sense of Financial Capability Surveys around the World’, the authors (Perotti, Zottel, Iarossi, and Bolaji-Adio) reviewed key approaches to measure financial literacy and capability. In doing so, they identified Financial Literacy to be often associated with financial knowledge.

So far, so good. But how do existing demand side surveys measure financial knowledge and why? Financial knowledge is usually measured through knowledge of basic economic concepts such as inflation, compound interest, or risk diversification. The main rationale behind this is that economists consider knowledge of these concepts as indispensible for making sound financial decisions, in particular for choosing optimal savings and consumption levels over lifetime. Moreover, given the number and complexity of financial products in the market today, measuring people’s awareness of products and services can be useful in assessing their understanding of the functions of financial service providers and their knowledge of risks and benefits associated with these products and services. Another often measured aspect of knowledge is practical know how on how to use financial services, such as how to open a bank account.

Let’s assume for a second, that you know all these things financial literacy surveys tend to ask for and would by these measures be considered as financially literate person. Would it mean that you are capable of taking sound financial decisions? Not necessarily, it is still a long way to go. Lack of skills, like numeracy skills the aforementioned question aims to measure could, for instance, prevent you from being able to shop around and identify products which fit your needs best. Similarly, certain attitudes or psychological traits such as being impulsive or behavioral characteristics such as self control problems could be an impediment to, for instance, building up savings cushions. That’s why, many of the surveys reviewed go beyond the narrow focus on measuring financial knowledge and literacy, but also seek to measure skills, attitudes, and financial behavior. For instance, a financial capability study conducted in Fiji includes a number of questions on people’s attitudes toward the future and on impulse purchase.

So let’s assume that you are perfectly knowledgeable and capable. Is even this a sufficient condition for you being able to take sound financial decisions? Again, it’s still a long way to go. Why? External factors, such as lack of access to finance insufficient transparency around financial services design and terms, or societal norms (e.g. for women in some societies) can constrain your capacity to act in your best financial interest. Figure 1 below tries to illustrate this relationship. This is why some surveys like FinScope or Global Findex also assess access and usage of financial barriers. Or why surveys such as the WB’s Financial Capability and Consumer Protection surveys also capture specific information on the level of people’s satisfaction with services offered by financial institutions.Source: World Bank 2013. “Financial Capability Surveys around the World. Why Financial Capability is important and how surveys can help.” World Bank. Washington, DC.

To come back to the question raised at the beginning, having numeracy skills is not enough to be considered as a financially capable person. Financial capability needs to be measured by assessing people’s financial knowledge, skills, attitudes, and behaviors. Further, collecting information on the enabling environment can help to get a better understanding of the importance of external factors on financial capability.

If you are a policy maker, practitioner, or researcher interested in conducting a survey to measure financial literacy, capability or issues in the related areas of financial inclusion and consumer protection this survey review may be a useful resource for you to identify the appropriate combination of methods for your policy and research objectives.